Monday, July 7, 2008

CNNMoney.com: Fannie Mae and Freddie Mac plunge-- Shares of mortgage financing giants Fannie Mae and Freddie Mac both plummeted Monday after an analyst with Lehman Brothers wrote in a report that the two companies may need to raise billions of dollars if accounting rules are changed.

Shares of Fannie Mae (FNM) fell more than 16% to $15.74. The stock set a new 52-week low of $14.65 earlier during the day. Freddie Mac (FRE) plunged nearly 18% to $11.91. It also hit a new 52-week low of $10.28 a share before recovering slightly at the end of the trading session.

Fannie Mae and Freddie Mac are government sponsored enterprises that help the mortgage market function by purchasing pools of loans and packaging them into securities.

According to a report from Lehman Brothers analyst Bruce Harting, the Financial Accounting Standards Board (FASB) is considering a rule change that would force Fannie and Freddie to move so-called off balance sheet securities onto their balance sheets...

Wall Street Journal:The Credit Crisis Is Going to Get Worse -- Twenty years ago, Ted Forstmann contributed a scathing – and prescient – op-ed to this newspaper warning that the junk-bond craze was about to end badly: "Today's financial age has become a period of unbridled excess with accepted risk soaring out of proportion to possible reward," he wrote in October 1988. "Every week, with ever-increasing levels of irresponsibility, many billions of dollars in American assets are being saddled with debt that has virtually no chance of being repaid." ...

We are in a credit crisis the likes of which I've never seen in my lifetime," Mr. Forstmann warns. He adds: "The credit problems in this country are considerably worse than people have said or know. I didn't even know subprime mortgages existed and I was worried about the credit crisis." ...

Straightforward economics tells us that when you print too much money, it loses value and prices go up. That's been happening too. But Mr. Forstmann is most concerned with a different, more subtle effect of the oversupply of money. When it becomes too plentiful, bankers and other financial intermediaries end up taking on more and more risk for less return...

The traditional definition of inflation (rising prices) and deflation (falling prices) don’t make sense in today’s world. That’s why people are confused. Ironically, the Fed wants you to be this confused, because it’s actually they who create inflation - which plants the seeds for eventual deflation...

From 1993 to 2006 the Fed created massive inflation by creating massive debt, keeping real interest rates negative and supplying plenty of credit to keep them there. This was particularly true from 2001 to 2006; in 2006 alone the Fed expanded the money supply by creating $4 trillion in new debt...

In 2007, we reached a point where there was just too much debt; no one could take on any more. This is where the Fed’s inflation machine breaks down: If no one can borrow or lend on the credit they offer the banking system, the money supply stops expanding. In fact, as people try to pay off all that debt (retire it) or default on it (destroy it), the money supply, bloated with debt, begins to shrink. Hence deflation.

What does the Fed do then? Why, they buy that debt themselves, to try to keep the money supply from deflating...

Despite these efforts, the money supply has probably deflated by the amount of write-offs -- by now, approximately $400 billion -- that banks have incurred...

Central banks are powerless to stop the money supply from deflating unless they take on the debt themselves. If not, it will be systematically destroyed by defaulting, and the money supply will shrink even more...